In 2014-0534841C6, the CRA commented on the definition of majority-interest beneficiary in subsection 251.1(3) of the Income Tax Act. The CRA is of the view that a person does not have to be a beneficiary of a trust to be a majority-interest beneficiary of the trust.
A majority interest beneficiary is defined as a person whose beneficial interest in the income (or capital) of the trust, if any, has, together with beneficial interests in the income (or capital) of the trust of all persons with whom the person is affiliated, a FMV greater than 50% of the FMV of all beneficial interests in the income (or capital) of the trust.
Suppose a wife is the sole beneficiary of a trust and the husband does not have any beneficial interest in the trust at all. According to the CRA, the husband would still meet the definition of “majority-interest beneficiary” by affiliation with his wife who has a greater than 50% beneficial interest in the income of the trust.
This CRA interpretation has far reaching consequences in light of the recently enacted trust loss restriction event rules in section 251.2. A trust loss restriction event occurs when a person becomes a majority-interest beneficiary of the trust. In the above scenario, if the husband is added to the trust as a beneficiary having more than 50% interest in the interest of the trust, there is a question of whether the addition of the husband triggered a loss restriction event. Based on the CRA’s view, there should be no loss restriction event because the husband was already a majority-interest beneficiary and did not become a majority-interest beneficiary on being added to the trust. This result appears to be consistent with the policy of the loss restriction event rules which is not intended to apply to changes in the beneficiaries of family trusts.